Lifting of Corporate Veil-Statutory Provisions

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Abstract

Among various other features of company, one of the the most outstanding feature is that a company is regarded as a Separate legal entity. After the incorporation if the company the company has its own legal personality and independent status. This is know as the concept of Corporate Personality. In the case of Salomon Vs A. Salomon Co Ltd.[1], the House of Lords held that the company possess a feature of Separate Legal Entity. This essay mainly focuses on the statutory provision of lifting up the corporate veil under the Company law.

Introduction

This concept of Corporate Personality separates the Directors, promoters, members from the company and creates its own identity. A company is an artificial person, but it cannot act at its ow, it can act only through a natural person or by its members. Thus we can say that “the company is an artificial person, controlled by its members and the business is carried on by real person, and for the benefit of, some individuals, i.e. some human beings are the real beneficiaries of the corporate advantages”.[2]

But sometimes the corporation may commit some kind of fraud or misrepresentation. In these cases to identify the main person behind such act, the facade of corporate personality might be removed. This is known as Lifting of Corporate Veil.

The Hon’ble Supreme Court in the landmark judgment of Life Insurance Corporation of India v. Escorts Ltd. 1985[3], held that-

“While it is firmly established ever since Salomon v. A. Saloman & Co. Ltd. 1897[4], was decided that a company has an independent and legal personality distinct from the individuals who are its members, it has since been held that the corporate veil may be lifted, the corporate personality may be ignored and the individual members recognized for who they are in certain exceptional circumstances”.

In some cases the court can lift up or pierce the corporate veil to reach the main person liable for the fraud or misrepresentation. The reason behind this piercing of the corporate veil is that the law will not allow the corporate form to be abused/misused. In other words, in the circumstances where the court feels that the corporate form of the company has been misused the court has the authority to lift up the veil and expose its true character. In the case of State of Uttar Pradesh and Ors. Vs Renusagar Power and Co. and others, 1988[5], the Hon’ble Supreme Court held that  “the veil of corporate personality even though not lifted sometimes is becoming more and more transparent in modern company jurisprudence“.

Lifting the corporate veil helps in discovering the economic reality behind the legal facade and prohibiting the indiscriminate malpractice of individual members vested with personal economic interests.[6]

In the case of Dimbleby & Sons Ltd v National Union of Journalists[7], Lord Diplock’s held that “The corporate veil in the case of companies incorporated under the Companies Acts is drawn by statute and it can be pierced by some other statute if such statute so provides; but in view of its constant recognition by the courts since Salomon v A. Salomon & Co Ltd[8], one would expect that any parliamentary intention to pierce the corporate veil be expressed in clear and unequivocal language.”

In the case of Prem Lata Bhatia Vs Union of India, 2006[9] the Hon’ble Delhi High Court held that the use of the rented premises by an individual using corporate forum which her wife as the only shareholder is not violative of renting terms on lifting the corporate veil.

The Corporate veil can be pierced/lifted by the Hon’ble court through the virtue of two methods:

  1. By Statutory Provisions
  2. By Judicial Pronouncements.

Statutory Provisions When The Corporate Veil Can Be Lifted Up

  • Misdescription of Name; Section 12, Companies Act, 2013.
  • Misrepresentation in Prospectus; Section 34 and Section 35.
  • Failure to return application money within the specified time period; Section 39.       
  • Investigation of Ownership of Company; Section 216.

Judicial Pronouncements When The Corporate Veil Can Be Lifted Up

  • Fraud and Improper Conduct.
  • To determine enemy character.
  • To protect and generate revenue.
  • Cloak or Sham.
  • Company avoiding welfare legislations.

In this paper we will be dealing with the Statutory provisions through which the Corporate Veil can be lifted up in detail :-

  • Section 12: Mis-description of Name

The Section 12 of the Companies Act, 2013 states that a company shall have its name printed on all the documents such as Bills of exchange, Promissory notes etc. In case the companies name has not been provided or not properly mentioned on Bills of exchange, Promissory notes, cheque, or order for money, then in such case the person who has signed such a document shall be held personally liable to the holder of such document. In the case of Hendon v. Adelman[10] the name printed on the cheque was ‘LR agencies limited’ whereas the actual name of the company was ‘L&R agencies ltd’. In this case the Signatory Directors were held personally liable under Section 12 of the Companies Act, 2013.

  • Section 34 and 35: Misrepresentation in Prospectus

Under Section 34-35 of the Companies Act, 2013 it is stated that in case of misrepresentation in the prospectus, the company, director, promoter and all the other member who authorized the issue of such prospectus shall be held liable to compensate the suffered loss/damage to each and every person who subscribed the share of such company on behalf of such untrue statements as stated in the Section 35 of the Act.

Apart from the damage, Section 34 provides that such persons may be held liable under Section 447 of the Act i.e Fraud[11] which provides the imprisonment for a term which shall not be less than 6 months but can extend to 10 years and shall also be liable to fine which may not be less than the amount involved in the fraud and may extend up to 3 times the amount of fraud.

But nothing provided in Section 447 shall be applicable in case if the person proves that such statement or omissions was immaterial or he had reasonable ground to believe, and did up to the time of issue of prospectus believe that the statement was true or the omission was necessary.

  • Section 39: Failure to Return Application Money

When the company issues share to the public, certain minimum subscription amount, as stated in the prospectus has to be paid to the company. If such minimum amounts hasn’t been received within the 30 days of the issue of prospectus or any other time period as specified by the SEBI , then the application money received shall be repaid within the 15 days from the closure of issue as provided in the Rule 11 of the Companies (Prospectus and Allotment of Securities) Rules, 2014. In case the said amount hasn’t been repaid the default directors of the company holding the office shall be held liable severally and jointly to repay that money with interest of 15 percent per annum (@15%)[12].

Also, in case of default the company and the officer in default shall be liable to a penalty of Rs. 1000/- for each day during which default continues or 1 Lakh rupees whichever is less.

  • Section 216: Investigation of Ownership of Company

Under Section 216 of the Companies Act 2103, the Central Government has been authorized to appoint one or more than one inspector to investigate and report on membership of any company for determining the true persons who are financially interested in the company and who control its policy or materially influence it.

Conclusion

The doctrine of corporate veil is not subject to a definite bright line test. It is the result of courts repeated struggles and decisions that has developed this doctrine to use it to the full extent. The decision to lift the corporate veil can be aided, at least in part, based on the opinion of qualified experts. In cases such as fraud, sham, agency, or misrepresentation the court can lift the corporate veil, although this is not the exhaustive list. However, the judgement to disregard the corporate entity will be based on a balance of several factors, all or some of which are necessary, but may not be sufficient to pierce the veil.


[1] UKHL 1, AC 22

[2] Gallaghar v. Germania Brewing Company [1893] 53 MIN

[3] 1986 AIR 1370

[4] Supra note 1

[5] 1988 AIR 1737

[6] H.K. Saharay, Company Law (5th edition, Universal Law Publishing Co., 2008) 12

[7] [1984] 1 WLR 427

[8] Supra note 1

[9] [2006] 71 SCL 142

[10] [1973] New Delhi LR 637

[11] Section 447, Companies Act, 2013

[12] Taxman’s Company Law and Practice, Companies Act, 2013

Written By

Abhinav Rana

University School of Law and Legal Studies, GGSIPU, New Delhi

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